Federated tumbles to quarterly loss

Analysts call results disappointing, but not terminal

CHICAGO (MarketWatch) -- Federated Department Stores Inc. said Wednesday that it tumbled to a third-quarter loss, blaming the costs linked to its May Co. purchase as well as some sales sluggishness at the May-turned-Macy's stores.

The parent of the Macy's and Bloomingdale's chains said it fell $3 million, or 1 cent a share, into the red. A year ago, the department-store chain made $436 million, or 90 cents a share.

Choppy trading marked much of Wednesday's session for shares of Cincinnati-based Federated
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At the open, shares slumped deeper than 2%, only to shift gears moments later to head higher, and then to fall again. By the close, they had fallen 1.2% to $39.87.

The latest results included $145 million in charges tied to Federated's efforts to turn May Co. stores, which it acquired last year, into Macy's as well as what the company called "related inventory valuation adjustments." Stripping those out, Federated said it would have earned 20 cents a share.

And on a continuing-operations basis, the retailer said it would have made 3 cents a share for the latest quarter ended Oct. 28, compared with 87 cents a year ago.

Sales climbed 6%, reaching $5.89 billion from $5.56 billion amid a September marketing blast to launch 400 Macy's stores that had once May been stores.

Federated's results were shy of analysts' expectations and soft on margins. Forecasts compiled by Thomson First Call pegged the average profit estimate at 25 cents a share.

In August, Federated predicted that it would generate quarterly earnings per share in a range of 15 cents to 20 cents.

The results were largely disappointing, owing to investors' expectations that the turnover of May stores to Macy's would lead to a sharp rebound in sales.

Bumps for new Macy's

CFO Karen Houget called the Macy's brand launch "successful," but conceded that the company "would have liked to have seen more progress in the performance of our new Macy's or former May doors post launch."

On a conference call with analysts, she said customers "responded well" to Macy's private-label brands -- all of which were new to the former May Co. customers.

She said that sales were weakest in home goods, across all categories, at all stores but "by far the most disappointing" at the renamed Macy's stores.

"There is a lot not working well in these stores," she said, ranging from big-ticket home merchandise to a dramatically reduced number of promotions and the learning curve sales associates at the former May stores are still on.

"We should have expected it to be harder and take longer to turn around the May home business, but we do expect progress in the fourth quarter," she said. Federated will "tweak" the percentage of space it devotes to home goods at the newer Macy's stores, she added.

However, overall sales at what Federated is now referring to as the "legacy" Macy's stores -- or those that have been long established -- as well as at the Bloomingdale's stores were encouraging.

"The fact that our legacy stores are doing so well reinforces the belief that our strategy (is) working," she said.

Analysts said the results were disappointing, but not terminal.

"Although business appears soft at Federated, we are only two months into the story," said Merrill Lynch analyst Stacy Turnof.

Noting that Federated is still one of her "top picks," she urged investors to hold on.

"Investors need to be patient as the rebranding strategy unfolds," she said.

Bank of America analyst Dana Cohen maintained her buy rating on the stock, noting that the merger will have "significant benefits."

"Given the magnitude of change at the May doors, the pace of improvement is difficult to predict, but Federated's leadership strength in both merchandising and operations is well-documented and, in our view, (it is) particularly well-suited to lead this change," she said.

However, she qualified her thoughts. "That said, expectations were higher as management as a history of guiding conservatively," she said.

Federated also affirmed that it expects same-store sales, or sales at stores open at least one year, to increase by 3% to 5% for the fourth quarter. This would yield a sales range of $9.1 billion to $9.4 billion.

Federated said it expects to earn, excluding merger integration costs and related inventory valuation adjustments, $1.40 to $1.50 a share for the current quarter, which includes the all-important holiday selling season.

These both are less that what Wall Street looking for. The First Call-derived average forecasts stand at earnings of $1.52 a share and sales of $9.18 billion.

UBS' Tan said this could result in "less upside" if the May-turned-Macy's stores "do not improve."

"There is some concern that Federated is building less cushion into guidance now that the May stores have been converted to Macy's," she said.

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